WHAT ARE YOUR OVERTIME
COSTS?
a direct impact on labor costs. Regardless of
whether a manager’s goal is to minimize the
total labor cost or maximize the productivity
of that labor employed, he will be confronted
with a seemingly unending series of
questions regarding wage levels, incentives,
labor negotiations, retirement, etc.
The agribusiness industry is not unique in its
continued reliance on manual labor. Nor is it
unique in its attempt to find ways to retain
control of wages and enhance the
productivity of that labor employed.
Thousands of dollars have been invested in
new physical plants and equipment by many
agribusiness firms, but rare is the firm which
has experienced a decrease in its total wage
bill as a result of such expenditures. More
often in this industry, recently employed
technological improvements add to
production levels and enhance labor
productivity, but seldom reduce the actual
size of the labor force. Agribusiness
retailers, in particular, are finding that there
exists no mechanical substitute for
employee-customer contact. Self-service
shopping, while it has reduced the labor
required in many non-agriculture retail
establishments, has not proved suitable to
retail farm supply, feed, and fertilizer
operations. Numerous other examples can be
found within the agribusiness industry where
labor has become a high-cost and almost
irreplaceable resource.
What About Overtime?
Of all the labor-related management concerns
noted above, overtime is a subject most often
overlooked by writers in the field. Yet
overtime represents a significant cost to
many firms. Many agribusiness firms
operate on a highly seasonal pattern, i.e., in
response to the resource requirements of
agriculture’s seasonal production. During
the peak season, management will often find
that a 10-hour day, 6-day week is necessary
to keep up with the customers’ needs.
Almost every sector of the agribusiness
industry has at least one period of the year
when its work force is compiling large
amounts of overtime. Some firms do not pay
employees for overtime worked and, instead,
attempt to offset the 10-hour days in the
spring with a few free days in the off-season.
Other employers pay a flat hourly rate
regardless of the hours worked. In the future,
these two situations will become less and less
prevalent. Unionization, federal employment
standards, and generally improved levels of
concern for labor by management will
convert this industry from one where the socalled “busy season” is accepted as a
consequence of the job, to one where the
standard working day is more strictly
adhered to and where substantial pay
premiums accompany overtime. Such an
Based on my own contacts with agribusiness
managers, I could easily conclude that labor
and labor-related costs have become their
prime administrative concerns. The
availability of a work force when needed,
employee turnover, employee competence,
unionization, fringe benefits, and most
recently, employee safety, probably occupy
half of a manager’s time. Obviously,
therefore, many management decisions have
1
WASHINGTON STATE UNIVERSITY & U.S. DEPARTMENT OF AGRICULTURE COOPERATING
adjustment will not be welcomed by
everyone in the industry. Some will accept
the change reluctantly. Others will succumb
only when forceful regulations have been
imposed on them by various public
institutions. But the change will be no less
inevitable and the impact on the industry will
be substantial. If they have not already,
overtime costs will soon become a real
concern to agribusiness managers.
large amounts of complex machinery are
employed, preventive maintenance is a very
important labor-intensive function. Yet, it is
a function which can be postponed in the
short run. Many in the labor force have
discovered that it becomes relatively easy to
delay maintenance until the end of the
standard working day. During the regular 8
to 5 shift, maintenance is conveniently
overlooked, but by the day’s end, employees
begin to find numerous adjustments or
corrections which must be made prior to the
beginning of the next day’s run. The
unsuspecting supervisor is “conned” into
agreeing with his work crew that overtime
must be employed. As a result, the cost of
maintenance increases, labor productivity
drops, and wages grow.
What control does a manager have in the area
of overtime expenses? When is overtime
warranted and when is it not? How can a
manager guard against the excessive use of
overtime? These are, or will become,
important concerns of modern agribusiness
managers. This paper is designed to consider
these questions and suggest guidelines by
which managers can regain some control
over labor costs.
Employee Collusion: As a one-time
employee of a paperboard manufacturing
plant in the Midwest, I have vivid memories
of the various schemes employed by my
working colleagues for the purpose of
generating unnecessary overtime. At the
time, I was a young college student who
found the overtime pay to be more attractive
(and necessary) than an extra hour’s sleep.
Anytime a “special order” was received by
management, the underground
communications channel conveyed this vital
information to the crew chiefs within a few
short hours. The crew chiefs would then
speak with their more “money-hungry”
employees and reach an agreement that the
special order would become an overtime
activity. All this was decided before
management even released the specifications
of the special order. Management would
then poll its more experienced plant
employees to determine how the order could
best be handled. Of course, all were
unanimous in their statements that it could
only be handled on an overtime basis. As an
employee, this collusion system worked to
my advantage -- losing a little sleep, but
Overtime Abuse
Who determines the size of your employees’
paychecks, you or your employees,
themselves? If, as a manager, you abdicate
your responsibilities in this area, your
employees will soon happily discover that
controls are lax and adjust their work habits
to their own advantage. And who would
blame them! If the decision to work
overtime rests with the employees, rationale
suggests that they direct their resource
(labor) in pursuit of the highest reward. If
overtime pays double or time-and-a-half, the
answer is very simple, i.e., accelerate their
use of overtime whether warranted by the
workload or not. As a manager, you should
be aware of the means by which employees
often abuse overtime privileges. Such abuse
may, therefore, be prevented entirely, or
stopped upon its discovery. A few such
means of abuse are discussed below:
Maintenance Postponement: In those
sectors of the agribusiness industry where
2
increasing my take-home pay by as much as
50 percent weekly. To my unsuspecting
employer, the results were disastrous, i.e.,
almost all special orders were processed at a
net loss, product quality deteriorated, and
stoppages due to breakdowns increased.
forced to absorb the cost! Many such
instances could be reported wherein poor
coordination and enforcement resulted in a
general work slowdown.
Working conditions were also a factor. On
many afternoons in August the temperatures
in the plant rose to the 100 degree mark.
When combined with poorly vented steam
from the corrugating machine, the heat made
it necessary for employees simply to slow to
a snail’s pace. Men lingered at their coffee
breaks and worker productivity dropped to
nil. To maintain production, working hours
were sometimes extended to 9:00 p.m. or
began at 6:00 a.m. when the plant
temperatures were more moderate. During
one such week I accumulated almost 20
hours of overtime!
Slowdowns: Work slowdowns are, perhaps,
the most common means of generating
excessive overtime. Unfortunately, it is also
the most difficult thing for management to
identify, prove, and bring under control.
General work slowdowns are often not even
intentional nor the sole fault of employees.
To illustrate this fact, I will return again to
my personal experiences in the paperboard
plant. In general, the total monthly workload
at this plant varied little. And yet, during the
summer months daily production levels
dropped noticeably and substantial overtime
was required to keep total production at
normal winter rates. Why? The most
obvious answer to this question was
employee absenteeism. The daily absentee
rate rose in direct proportion to the climate.
On those warm days, particularly those
immediately preceding or following legal
holidays, the plant was nearly abandoned.
Plant employees, supervisors, and
administrators alike simply failed to show up
for work. On those days when the shipping
clerk failed to show up, his work crew could
hardly function. Trucks were misloaded and
many outgoing shipments remained on the
loading docks for lack of assignment
destinations. Backups occurred throughout
the plant whenever the dispatcher chose to go
fishing, because work orders and crew
assignments failed to get from the head office
to the plant. On one very pleasant day the
supervisor chose to leave for home about
mid-afternoon. Strength specifications were
left buried on his desk and the entire
assembly line was forced to shut down by
3:30 p.m. Union regulations prohibited the
release of men after 1:00 p.m. The plant was
Some work slowdowns were intentional.
One of my colleagues was especially adept at
operating a large staple press. Under his
control, this machine would produce at such
a high rate that loaders, stockers and pallettruck drivers could not keep up with the
output. As a result the press operator was
asked by his co-workers to slow down
because compared with his speed, those on
the other similar machines appeared slow and
incompetent.
Are There Solutions?
The insidious thing about the extensive use
of overtime is the inevitable decline in per
worker productivity combined with a cost
that may add as much as 50 percent to your
regular weekly labor expense. A processing
firm showing a profit at existing production
levels and a regular work week may discover
that at an overtime wage rate, a net loss is
incurred for every unit processed. Can your
firm survive at overtime wage rates?
Probably not for very long. Hence the best
solution to overtime abuse is its prevention.
3
The first guideline for preventing overtime
abuse is to establish an accounting system
which is “overtime sensitive.” In other
words, your accounting system should
prevent the inclusion of overtime costs in
larger categories where it goes unnoticed or
is impossible to separate out. Ask your
administrative staff to compile a regular
schedule of overtime hours employed, who
authorized it, and why. If a particular
division or supervisor within your firm
reports rising overtime usage, ask for
justification. Generally, however,
establishing a setting of accountability will,
in itself, reduce most overtime abuse.
with modest, but regular, overtime
supplements to their regular pay. Managers
should never allow such supervisors to
influence their control of the labor force.
Similarly, managers should establish and
enforce a regular company policy regulating
absenteeism. Make sure that persons at all
levels, from the shop apprentice to the plant
superintendent, know the policy and the
consequences of violating it. In this regard,
unionization often works to the advantage of
management because labor contracts usually
spell out the exact terms of an absentee
policy.
Further Precautions
A second guideline suggests that
management never convey to its employees,
by directive or by default, the prerogative of
approving overtime. Overtime approval
should not become routine. It represents the
incurrence of additional costs, often not
budgeted for, and each decision to use it
should rest on the merits of the case.
Suppose preventive measures were
implemented too late and overtime has
already built to an unacceptable level. Then
what can be done to regain control?
First of all, don’t press the panic button and
cut all overtime in one fell swoop. The
consequences to such a drastic move may be
worse than anticipated. It may deliver a
severe blow to the morale of your work
force. Furthermore, there are some situations
where modest overtime usage is the best
option. For example, some overtime in the
peak season may be less costly than hiring
additional personnel. This is particularly true
if the peak season is relatively short and/or
additional part-time personnel are difficult to
find. Hence, management should inquire as
to the reasons underlying the use of overtime,
its likely duration, and its impact on the
profitability of current (and future)
operations.
Third, managers should establish realistic
time standards for various jobs. Accumulate
and report actual labor usage against these
standards. If intentional slowdown does
occur, management will then be able to
rapidly identify it. Wages paid on a piecerate basis sometimes aid in this situation.
Employees begin to take pride in themselves
for their own productivity and receive
rewards in accordance with their efforts.
Overtime is often necessary and unavoidable
when beginning a new product run, moving
to new facilities, or making extensive
adjustments in the plant or production
processes. But don’t allow it to become a
habit. When the real need is eliminated, cut
back quickly to the regular work week.
Whatever you do, don’t antagonize workers
with statements accusing them of making too
much money. Such statements are based on
false premises. First of all, your firm’s
profits and your employees’ earnings are not
always diametrically opposed. Many
employee incentive plans are based on the
Some labor crew supervisors try to gain
favor with their people by providing them
4
premise that both could become winners.
Second, it should not be company policy to
minimize or otherwise restrain the earnings
of its employees. To the contrary, company
policy should stipulate the avoidance of
paying excessively for a particular service.
Such a policy is not only more rational, it is
also more easily assimilated by a labor force.
an overweight individual. The overweight
situation is further aggravated by the
continued consumption of resources in
excess of those required to maintain proper
health. Maintenance postponement,
employee collusion, and general work
slowdowns are all means by which excessive
labor resources are absorbed by the corporate
body. In such cases, weight controls not only
make sense, but may be necessary for the
survival of the firm. Prevention is always the
best cure and entails tight management
controls. If overtime abuse is already
suspected, management should investigate
the underlying causes before seeking to
eliminate it. All areas of the firm and all
levels of personnel should be held
responsible for any overtime abuse. Under
no conditions should the manager antagonize
his employees on the subject of excessive
wages. Instead, the concept of excessive
costs should be used as the basis for a
reduction in overtime usage.
Finally, if you decide to make overtime cuts
in some areas and not others, make sure you
are prepared to answer the question of
discrimination. Pressure to reduce overtime
abuse should be applied equally to all
persons, departments and divisions. If
overtime appears constantly in one area and
not others, you may wish to consider altering
your workload assignments. Some firms use
a labor pool system whereby personnel can
be taken from one area and reassigned to
work in another area until the backup has
been eliminated and the labor force returned
to the regular work week.
Summary
In the March 1972 issue of Canadian
Business, Robert J. Frank states that a firm
burdened with overtime abuse is much like
Ken D. Duft
Extension Marketing Economist
5